Guess Battered by Investor Fears of Consumer Spending Slowdown

Retail: Shares have fallen nearly 29% since apparel maker announced plans last week for a new stock offering.

Buoyed by rosy earnings and an upcoming stock offering, Guess looked set to launch an aggressive expansion that would see it open 60 stores this year.

But the Los Angeles retailer and designer of high-priced jeans and other apparel has run afoul of Wall Street, where nervousness over a potential slowdown in consumer spending has sparked a recent sell-off in the shares of trendy clothing companies and other retailers.

On Wednesday, that skittishness sent Guess shares down $2.31, or 10%, to close at $19.94 in New York Stock Exchange trading. Other specialty retailers caught in the dragnet included Liz Claiborne, down 3.7% to close at $41.13, Tiffany, down 6% to close at $68.56, and Gucci Group, down 4% to close at $83.81.

Adding to Guess' woes was a Goldman, Sachs & Co. report downgrading a broad range of retailers, including Wal-Mart, Target and Costco Wholesale on the specter that consumers may spend less in the coming months.

Guess shares have plunged nearly 29% since the company disclosed plans Thursday to sell 4.5 million new shares to pay off debt and fund expansion. The decline has sliced about $36 million off the value of the offering since the close of trading on the day of the announcement. Some analysts wonder if Guess will delay or postpone the offering.

"I wouldn't think they would go ahead. . . . The appetite of the market is not good right now, but since they just filed for the offering they have some time," said John Rouleau, an analyst at Gruntal & Co. in Chicago.

Guess officials wouldn't comment, citing Securities and Exchange Commission rules about what executives can say in advance of an offering.

Guess, one of Southern California's top fashion names, sells bluejeans--a basic pair starts at about $50--through department stores and the company's chain of 167 shops and outlet stores. About half its $600 million in annual sales come from its rapidly expanding chain of company-owned stores. An additional 25% of its sales is generated at just three retail chains: Federated Department Stores --owner of Bloomingdale's and Macy's--May Department Stores and Dillard's. The remaining sales come from other retailers and licensing deals.

Guess is controlled by Maurice, Paul and Armand Marciano, three brothers who would still collectively own 74.3% of the company's stock after the proposed offering. The brothers have a reputation for keeping tight reins on Guess, even over the objections of other shareholders.

Indeed, the company warns in regulatory filings discussing the offering, "These officers may have different interests than our other stockholders and, accordingly, they may direct the operations of our business or use the proceeds of this offering in a manner contrary to the interests of our other stockholders."

Postponing or delaying the offering would be a setback for the company, which only a week ago intended to use the proceeds to retire roughly $80 million of debt, a move that would have added about $4.5 million annually in profit, said Darren Barker, research analyst at Wedbush Morgan Securities in Los Angeles. Moreover, at last Thursday's closing stock price of $28, Guess would have had an additional $40 million to pay off other debt or to fund expansion.

The decline in Guess shares comes against a backdrop of improved financial performance for the company, which is headquartered on Alameda Boulevard in the city's garment district. On Monday, Guess said earnings rose 34.3% to $15.4 million for the quarter ended April 1 compared with the first quarter of 1999. Revenue rose 46.3% to $188.8 million.

Same store sales, a key measure of a retailer's health, rose 19.2%. Guess' women's and girl's lines are selling particularly well, the company said.

Inventories, however, have nearly doubled over a year ago, growing at about twice the rate of sales and that may have spooked investors, Barker said.

"That's a red flag that sales growth could slow," Barker said.

Nonetheless, Barker doesn't believe the rapid inventory increase is all that alarming. He noted that Guess opened just eight of its 60 planned stores so far this year and will need to stock future openings.

Rouleau believes the ballooning inventory is more a result of poor buying decisions made six to nine months ago rather than a warning of slowing sales. Yet, he said, consumers are starting to move toward "more moderately priced" merchandise.

"Consumers realize that they don't have to pay high prices for fashionable merchandise," Rouleau said.

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Guess' Game

Since hitting a 52-week high of $33 on March 30, the stock of Guess has lost about 40%.